Meeting the goals of the Paris Agreement will require increasing the current rates of global climate investments by six times by 2030. In cities alone, trillions of dollars will be needed across sectors such as renewable energy, public transportation, water and waste, and green buildings. This infrastructure is often too large for city governments to fund on their own despite the potential for financial and social benefits. Pension funds, which represent USD 56 trillion in assets globally, will be a key source of private capital for climate action in the next decade.

Subnational pension funds, in particular, represent significant sources of untapped capital. As shown in Figure 1, this brief defines subnational pension funds as those that limit membership to a set location beyond the national level (province, region, state, city) or occupation (i.e. healthcare workers or union members). Subnational pension funds are long-term investors willing to prioritize consistency over the possibility of outsized returns and are familiar with local investment conditions and opportunities. With these factors in mind, subnational funds have an opportunity to be leaders in financing a just climate transition.

Figure 1 ES: Diagram of pension funds considered in this report

Subnational pension funds vary widely in their size, membership demographic, and management of assets, even within a country. This brief examines seven countries with varying types of subnational pension funds – Brazil, Canada, Germany, Netherlands, South Africa, United Kingdom, and United States – with an estimated aggregate of at least USD 9.5 trillion in assets under management. In examining the subnational pension funds within each country, this brief identifies several common structural elements of a subnational pension fund and examines how these elements impact a fund’s willingness to invest in urban climate-smart infrastructure.

Subnational pension funds face a variety of barriers to investing in urban climate-smart infrastructure. Most institutional investors face a common set of barriers to these investments, including technology risk (both real and perceived), navigating local and national regulations, and a lack of investment-ready, bankable projects with suitable investment mechanisms. Subnational pension funds face some of these common barriers more acutely due to their size and low-risk appetite, as well as additional challenges to scaling their climate infrastructure investments. Funds with different structural elements and attributes will face each of these barriers to varying degrees.

There are also a variety of opportunities for subnational pension funds to overcome barriers and increase investment in urban climate-smart infrastructure projects. These include opportunities within fund structure, such as changing asset management strategies and directing investment toward local projects, which can increase available capital and reduce risks. There are also financial vehicles that can overcome specific barriers and build capacity, ranging from guarantees and first-loss tranches to green bonds and supply-side aggregation. Some of these opportunities can be pursued by the subnational pension funds themselves while others require the involvement of other actors like public finance institutions and city governments, but all require assistance from enabling environmental factors, such as a strong pipeline of bankable projects.

Looking forward, there are steps that subnational pension funds, city and state governments, infrastructure developers, and public finance institutions can take to facilitate subnational pension fund investment in climate-smart infrastructure.

• Subnational pension funds can make net zero commitments and set interim targets, build internal capacity, and utilize aggregation mechanisms to tap into benefits of scale.
• Local governments can provide long-term regulatory stability and help align priorities, in addition to working with developers to set up project preparation facilities to boost the supply of bankable projects.
• Infrastructure developers can work closely with city governments and subnational pension funds to provide financing options that both appeal to subnational pension fund investment teams and address city infrastructure needs.
• Public finance institutions can invest in blended finance instruments to de-risk investments and crowd-in private finance


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